Google eyes China as Baidu fumbles

By Alexei Oreskovic and Melanie Lee

SAN FRANCISCO/SHANGHAI (Reuters) - In 2005, China administered a spelling test that asked respondents to spell "Google" for a search market report: only 60 percent took the test and more than 20 percent got it wrong.

Four years later, Google Inc (GOOG.O), whose whimsical name is synonymous with Internet search in much of the world, is still struggling for recognition in China, the world's largest Internet market by users where local rival Baidu Inc (BIDU.O) dominates.

Yet, Baidu's switch to a new advertising system, Phoenix Nest, may be the catalyst that boosts Google's market share.

Last month Baidu warned investors it will lose customers and post lower revenue than expected in the upcoming quarters due to the switch.

Analysts say Google could capitalize on Baidu's disruption, but note that the U.S. company needs to more broadly revise its strategy and align itself with local companies to gain on its search rival in China.

"For whatever reason right now, the brand just doesn't have the same cachet (in China) that it has here," Broadpoint AmTech analyst Benjamin Schachter said of Google in China.

Revenue from China is just a fraction of Google's roughly $22 billion in annual, worldwide sales, analysts said. But the country's massive population and fast growth make it key to the future, particularly as growth slows in mature markets like the U.S., where Google already has a roughly 65 percent share.

Google has overtaken many of the other search companies in China, including Yahoo Inc (YHOO.O), growing its share of China's 2 billion yuan search market to 31 percent in the third quarter. But Google has been unable to crack Baidu's share of the market, which stood at 64 percent share in the third quarter of 2009, according to Analysys International.